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Fixed rate bonds

Are you looking for a way to earn more from your savings? You could try stocks and shares, but that can be risky. Another option is to lock the cash away in a fixed rate bond. Here's how they work...

Compare fixed rate bonds[1]

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Banks and building societies want you to invest your cash in their savings accounts, which is why they pay you interest.

A fixed rate bond can help you earn a much higher rate of interest. But you have to be sure that you won't need to withdraw the money during the fixed term, otherwise you may have to pay a penalty. Some deals simply don't let you withdraw the cash

But with a normal easy-access account the bank or building society doesn't have any security - you can withdraw your money whenever you like.

That's why they are happy to pay a little bit more to savers using fixed rate bonds.

These are accounts where you agree in advance not to touch your cash for a set time, usually between six months and five years.

In return for your money for a guaranteed time, the account provider guarantees you a fixed rate of interest. That means that, even if rates fall elsewhere, you will continue to get the amount you agreed.

Rates vary hugely, so it always makes sense to compare fixed rate bonds and find the best one for you.

Who are fixed rate bonds right for?

It's not a good idea to lock your rainy-day fund up in a fixed rate bond. Some don't allow any withdrawals, while others charge a whopping penalty fee if you do take your cash out.

Piggy-bank

Most advisers suggest keeping between three- and six-months worth of salary saved in an easy access account. That way, in an emergency the money is easy to get hold of.

You can still maximise the interest you earn on that cash by comparing savings accounts and choosing a market-leading account.

But if you have some money that you can afford to lock away for a period, then it could be worth considering this option.

How much do you need to invest?

Fixed rate bonds are usually suitable for people with a lump sum to invest. In fact, quite often they have a high minimum amount needed to open an account.

It's usually between £1,000 or £2,000 and there's often a maximum deposit of about £500,000. Check the small print on your paperwork to make sure it's suitable for you.

Sometimes, the rate of interest you can earn from this sort of product is tiered, so it rises depending on the amount in the account.

What are the risks?

Placing your cash in a fixed rate bond isn't as risky as investing in stocks and shares. After all, your balance can't go down.

A bond of this type is really a fixed-term loan from you to the provider (the bond issuer), usually in return for a higher interest rate than you may get from traditional deposit accounts
Money Advice Service

But that doesn't mean that there aren't risks. When you agree to a fixed rate for a set period, you're stuck with it.

And that means that if the market changes and average interest rates go up, you could be left trapped in an uncompetitive deal.

When comparing fixed rate bonds you need to consider both the rate the account pays and how long it lasts. Find a balance that you're comfortable with.

Protecting your nest egg

Don't forget that only up to £85,000 is covered under the Financial Services Compensation Scheme, or £170,000 in a joint account.[2]

That means only that much is protected if the bank collapses. If you're lucky enough to have more than that to save, you may want to consider the amount you hold with each institution.

Watch out, as some banking brands are owned by the same firm.

For example, if you had £85,000 saved with first direct and £85,000 saved with HSBC, only half of that is guaranteed. That's because HSBC owns first direct.

What are the alternatives?

If you don't want to put your money completely out of reach for six months or more, there are other options.

As a general rule, the more restrictions a savings account comes with, the higher the interest rate.

You could earn a decent return on a regular saver account, where you agree to pay a minimum amount in each month.

Some easy access accounts restrict the number of withdrawals you can make in any one year and pay a higher rate of interest as a result.

If you're not sure that this is the best option for you, compare a full range of savings accounts to find the right one.

By Felicity Hannah